European authorities still punishing Greece – Can they be stopped?

Alexis Tsipras has a tough job. He is leader of the Syriza Party of Greece, a left party that has risen meteorically in the past three years: from 4.6 percent of the vote in 2009 to 27 percent last June. It is now the most popular party in the country and Tsipras could be the next Prime Minister.

Unlike most of the eurozone’s leaders, he knows what is wrong with Greece and the eurozone, and so does his party: austerity. “We have become the guinea pig for barbaric, violent neoliberal policies,” he said at a forum at Columbia University Law School last week, in which I participated.

Tsipras notes that Greece’s fiscal problems could be resolved if the rich paid their taxes. The IMF’s latest numbers [PDF] concur on this. According to the Fund, “annual uncollected net tax revenue [is] at 86 percent of collections in Greece, against an OECD average of 12 percent.”

So the European authorities – the so-called “troika” of the European Central Bank (ECB), European Commission, and International Monetary Fund (IMF) – took what was a manageable problem that was caused by a world economic recession, and made it into a serious depression. More than 26 percent of Greeks are unemployed. The economy has shrunk more than 20 percent since 2008, including a 6 percent decline in 2012; the IMF projects another 4.25 drop this year.

The Syriza party has proposed an end to the budget tightening that has caused the depression. The troika wants Greece to stay the course and says growth will turn positive next year. But they have been saying this for years now, and it hasn’t happened – in just two years the IMF lowered its GDP projections by 7 percentage points. Greece is now in its sixth year of recession, and the social costs have been enormous. According to the IMF this month [PDF]: “Greece is beginning to face an ‘unemployment trap’: the length of the Greek recession entails the risk that the skills of the long-term unemployed will become obsolete . . .”

And even if 2014 were to be the year that things finally turn around, how long would it take Greeks to recover their living standards under the program of the troika? From the IMF’s projections, it looks like at least seven more years. And while most of the budget tightening of 2012 came from tax increases, the program that Greece has signed on to calls for big, painful spending cuts this year and beyond.

So even if the troika’s program “succeeds” in that the economy finally begins to grow again, a lot of unnecessary suffering lies ahead.

What is the alternative, if Greeks refuse to submit to the “barbaric, violent, neoliberal” experiment any longer? Clearly it would involve exiting the euro, and re-negotiating the Greek debt.

As a matter of economics, it seems pretty clear that Greece would have been spared most of its current and future misery if it had left the euro, e.g. in 2010. Of course there would be an initial shock to the financial system and the economy, but it would not have caused years of depression, as the European authorities’ program has done.

The example of Argentina at the end of 2001 has been cited many times, but it is still widely misunderstood. Most people think that Argentina – which began to recover just three months after its devaluation and default — got a big boost from exports (due to the sharp devaluation of the peso) and a “commodities boom” that followed. In fact, Argentina’s remarkable recovery after 2002, in which the country reduced both poverty and extreme poverty by more than 70 percent, and achieved record levels of employment, owed very little to exports. And it owed even less to the export of commodities. What made most of the difference was that Argentina got control over all of its macro-economic policies – not only the exchange rate, but also fiscal and monetary policy. It was thus able to embark on a different set of policies, and the recovery was led by domestic consumption and investment.

Greece is actually much better situated than Argentina to say goodbye to its tormentors. Its exports are more than twice the level that Argentina’s were when it defaulted and devalued. It has a more developed financial system and is a more developed country, with about three times the per capita income that Argentina had. And should it need to borrow hard currency to pay for imports, there are more sources of possible financing today than there were for Argentina 11 years ago.

But Greece most likely would not have much need for foreign borrowing if it were to exit the euro and suspend its debt payments. Its trade is now nearly balanced, with a deficit of just 0.3 percent of GDP, as a result of the depression. And as happened in Argentina, as soon as investors see that the financial system is stabilized, billions of euros would come back to Greece, since a cheap currency will make all kinds of assets attractive.

But we don’t have to just look at Argentina to see that financial crises associated with devaluation and capital flight don’t do the kind of damage that Greece is living through. We can look at any of the worst financial crises of the past 20 years – including Indonesia, Malaysia, South Korea, and Thailand during Asian financial crisis. Despite terrible mismanagement of these and other financial crises, none of these countries lost as much income as Greece has, and all of them recovered much faster than Greece is projected to recover under the troika’s best case scenario.

Indeed, former IMF economist Arvind Subramanian made a compelling argument last year that if Greece left the euro, its economy might well recover so rapidly that other countries would want to leave too.

But economic reality is one thing, and political reality is another. Tsipras and the Syriza party don’t propose leaving the euro, and I would not criticize them for that. A political party cannot move too far ahead of the electorate, and it could be that the majority of the country is not ready to get rid of the euro. A government that decided to go that route would want strong backing from the public, and the ability, leadership, and expertise to do it right, so as to minimize the initial damage.

Still, the conversation needs to be had, not only in Greece but in Spain and other eurozone countries that are being subjected to years of unnecessary suffering, and having their economies restructured in ways that could result in more poverty and inequality for decades. At the very least, a credible threat to leave the euro must be there if the European authorities are going to make serious concessions. If not for the tremendous resistance of the Greek people – including Syriza — the troika would probably not have reduced Greece’s interest payments (which are now just below the European average). And the IMF has acknowledged, in its latest country report [PDF], that more of Greece’s debt will have to be cancelled.

But these and other concessions won’t bring Greece out of its misery, so long as the troika is still shrinking the Greek economy, and forcing cuts in essential services such as health care. Unless they reverse course, leaving the euro may very well end up as the only sensible option – not only economically, which it already is, but politically as well.

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It is really weird that Greece is pushed through austerity, while US increases debt ceiling to unlimited level and prints money as much as it wants.
Some countries are allowed to live against neoclassical laws and some are not.

Fantastic post. You mention that during the Asian Financial Crisis none of the countries lost as much income as Greece. Lord Keynes recently posted about the declines in Europe during the first years of the Great Depression (1929-1933). As I recall, despite hyperinflation in Austria, income and unemployment were not nearly as bad as Greece today. Considering how we terrifying the Great Depression sounds, it’s amazing that today’s depression continues without similar concern.

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